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Renewable Fuel Standards Update - The U.S. Environmental Protection Agency Reduces 2013 Standard for Cellulosic Biofuel; The D.C. Circuit Rejects Challenges to 2013 Standards

May 12, 2014 | Oil, Gas, Resources & Mining

 

In May 2014, the U.S. Environmental Protection Agency (the “EPA”) revised downward the 2013 standard for cellulosic biofuel; and, in an unrelated action, the Court of Appeals for the D.C. Circuit upheld certain aspects of the 2013 renewable fuel standards. For more information about the Renewable Fuel Standard program, see our August 6, 2013 Alert, and November 20, 2013 Alert, regarding the 2013 and proposed 2014 standards, respectively.

Under Section 211(o) of the Clean Air Act, each November the EPA is required to set annual renewable fuel percentage standards for cellulosic biofuel, biomass-based diesel, advanced biofuel (which includes cellulosic biofuel and biomass-based diesel) and total renewable fuel (which includes advanced biofuel) for all gasoline and diesel produced in or imported into the U.S. during the following year. The renewable fuel standards are expressed as volume percentages and are used by each refiner, blender or importer to determine its renewable fuel volume obligations. The EPA sets the applicable percentages so that, if each regulated party meets the percentages, and if projections of gasoline and diesel use for the year are accurate, then the amount of renewable fuel, cellulosic biofuel, biomass-based diesel and advanced biofuel used will meet the required volumes on a nationwide basis. Thus, to set the renewable fuel percentage standards, the EPA must first specify the required volumes for each fuel type.

On August 6, 2013, the EPA issued the renewable fuel standards for 2013. Even though the standards should have been issued in November 2012, the EPA determined that they would apply to all gasoline and diesel produced in 2013, including that produced prior to the effective date of the final rule. However, the EPA extended the compliance date to June 30, 2014.

The Clean Air Act requires that the EPA base the standard for cellulosic biofuel on the projected volume of cellulosic biofuel to be produced during the year. However, cellulosic biofuel production has consistently lagged behind the levels projected by the Clean Air Act and by the EPA, with less than 1 million gallons of cellulosic biofuel produced in 2012. In August 2013, the EPA eliminated the cellulosic biofuel requirement for 2012 and set the 2013 standard at 6 million gallons, well below the 1 billion gallons set by the Clean Air Act (all volumes ethanol equivalent).

The EPA Issues Direct Final Rule Reducing 2013 Standard for Cellulosic Biofuel

In October 2013, the American Petroleum Institute and American Fuel and Petrochemicals Manufacturers requested that the EPA reconsider the 2013 standard for cellulosic biofuel due to substantial reductions in anticipated biofuel production by KiOR, one of only two companies (the other being INEOS Bio) expected to produce cellulosic biofuel in 2013. In January 2014, the EPA granted the petitions for reconsideration.

On May 2, 2014, the EPA issued a direct final rule reducing the 2013 standard for cellulosic biofuel from 6 million gallons to 810,185 gallons based on the amount of cellulosic biofuel actually produced in 2013. Notably, even though two days after the EPA finalized the 2013 rule in August 2013, KiOR reduced its projected cellulosic biofuel production for 2013 from 3-5 million gallons to 1-2 million gallons, KiOR produced only 663,000 gallons of cellulosic biofuel in 2013. In its March 2014 Annual Report, KiOR announced a net loss of $347.5 million for 2013, and stated that “[w]e have substantial doubts about our ability to continue as a going concern” due to uncertainties about its ability to raise additional capital.

The D.C. Circuit Upholds Certain Provisions of the 2013 Renewable Fuel Standards

On Tuesday, May 6, 2014, the D.C. Circuit rejected industry challenges to the 2013 renewable fuel standards in Monroe Energy, LLC v. EPA, No. 13-1265. Monroe Energy claimed that, when the EPA set the standard for cellulosic biofuel below the level specified in the Clean Air Act, the EPA was required to reduce the standard for advanced biofuel as well. The court disagreed, holding that the EPA reasonably determined that the shortfall could be made up using other types of advanced biofuels, such as biomass-based diesel and imported sugarcane ethanol.

Similarly, the court held that the EPA was allowed to consider the availability of carryover 2012 Renewable Identification Numbers (“RINs”) in determining whether the total renewable fuel standard could be met despite the E10 blendwall. The EPA concluded that, under conservative assumptions, in order to meet the 2013 standard for total renewable fuel of 16.55 billion gallons, 14.5 billion gallons of ethanol consumption would be necessary, 1.4 billion gallons in excess of the projected blendwall. However, the EPA determined that it was unnecessary to adjust the standard for total renewable fuels because more than 2.6 billion carryover RINs (i.e., almost twice the amount needed based on the EPA’s conservative assumption regarding the blendwall) were available to demonstrate compliance. The court held that the EPA’s approach was reasonable and that the EPA was not required to set the standard for total renewable fuel based solely on the projected volume of renewable fuel that could be consumed during the year. The court also held that the EPA reasonably determined that maintaining the standard for total renewable fuels set by the Clean Air Act would create demand pressure for increased consumption of E85, which would effectively raise the blendwall, and promote the use of non-ethanol renewable fuels such as biodiesel.

The court also rejected Monroe Energy’s claim that the 2013 standards should be vacated due to the EPA’s failure to promulgate them timely. The court held that the EPA reasonably decided to preserve the 2013 fuel standards while extending the compliance deadline to June 2014.

The court granted the motion of the American Petroleum Institute and American Fuel & Petrochemical Manufacturers, which was joined by the EPA, to hold in abeyance challenges to the 2013 standards regarding lack of notice of the EPA’s use of updated U.S. Energy Information Administration information and approval of a small refinery exemption.

We will continue to update developments related to the renewable fuels program.


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